business essay

FDI with multinationals

Published: 23, March 2015

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Comparison between U.S and European multinationals

Van Den Bulke `s (1979) book compares and contrasts the different characteristics of U.S and European firms. He highlighted how European multinationals can be more patient with low returns on investment and troublesome political conditions abroad because they depend much more on foreign markets than U.S firms because their home country is often small (like Ireland's) while U.S firms are less knowledgeable and more financially impatient and less sympathetic about local aspirations and more likely to play the politics of divestment. The measure initiated in 1985 which led to the completion of an internal market for the European Community coincided with multinational corporations expanding into the E.C with activates involving such area s as Greenfield investments, acquisitions, restructuring operations and joint venture s and alliances.(Yannopoulos 1992 in Cantwell).which further more lead to the acceleration in the growth of foreign direct investment in the European Community. In his work Yannopoulos(1992) highlighted the reason s why European integration was an integral part of U.S Multinational investing within the European Community, highlighting that the major impact on inward investment comes from the increase in the location advantages of the internal market and that the location advantages of alternative host regions to foreign direct investment.

The removal of physical barriers to trade, the reduction in technical barriers to trade and the elimination of financial barriers, such as exchange market controls, will bring benefits to both insiders and outsiders trading in the Community locations inside the single market and may also become more attractive particularly for international sourcing by multinational corporations as a result of the efficiency gains expected from further economic integration.

Types of multinational activity

Beherrman (1972) was able to identify and label different types of multinational activity that existed. he was able to break down the different types of multinational activity which existed into four main groups . The resource seekers, which seek to find the cheapest place with the cheapest resources in order to conduct their business. The different of resources in which resource seekers analyzes are human, physical, technological and organizational resources. The market seekers included companies who seek to protect and take advantage of new markets, there sole purpose is to increase their market share by gainig access to markets in which they see the potential for growth and in which where the hope to be the first movers into the prospected market in order to gain the largest market share possible. Efficiency seekers , look to benefit from different factor endowments, economic systems, policies and market structures to concentrate production in area which they see as the biggest prospect for growth.. Strategic asset seekers engage in FDI as a means for sustaining or enhancing their international competitiveness. Luo (2001) noted that the closer relations are between the multinational and government, the more profitable the relationship is likely to be.

In their research Braconier and Ekholm(1990) concluded that horizontal MNE s are multi-plant firms that seek to exploit their existing advantages and replicate roughly the same activities in many locations. From their model they found that the major ignition of moving outward is the intention to reap benefits of the market opportunities abroad and use the economies of scale effect. If a produced good were held to be tradable a substitution would be expected between foreign and home employment. Their 2001 work also showed that U.S MNE s using a vertical FDI model appear to reduce employment at home by allocating labor intensive stages of their affiliates in developing countries. Driftfield (2003) highlights that the traditional explanation of the existence of multinational enterprises is that firms transfer firm-specific assets across national boundaries but internalized within the firm. Firms operating in the foreign country then have to undertake the process of adapting this technology to a new environment, to take account of local working practices, available human capital and consumers tastes for example.

FDI from the Host country Perspective

Introduction

FDI is an attractive and robust form of capital that is highly attractive to governments across the world for which there is intense competition to lure investors to host nations. There are different motives depending on the wealth and economic development of the country, but essentially the aim is to increase wealth and economic activity, hence boosting national savings and increasing tax revenues and balance of payment levels. Countries like Ireland have leveraged a small-educated workforce to produce products for exports markets, and greatly improved the overall wealth of a nation.

In an extension of Porters Diamond (Dunning 1997) brings the role of multinational business activity into play as a factor influencing national competitiveness. Assuming as per the OLI framework, the multinational is bringing a competitive advantage, or a different set of advantages than held by domestic producers,it will lead to an increase in competition in the local consumer market, with local producers having to neutralize the multinational advantage to survive, thereby increasing the competitiveness of the local firms and enabling the potential for effective exporting of local produce. This is the important concept of spillover benefits. Caves (1974) initially identified spillovers which essentially are all the indirect benefits accruing throughout the host economy as a result of foreign direct investment. Many studies (Caves 1974,Lui et al 2001) have attempted to model the factors affecting productivity improvements with some success, but there has been conflicting evidence presented as to the effect of variables such as capital intensity and technology gap between home and host nation.

Rationale behind host countries attracting FDI

Buckley and Casson (1976) and Dunning (1979, 1988, 1993) articulated a traditional analysis of why firm seek to undertake FDI. The necessary condition within this framework for the firms to undertake FDI is that it owns an asset that provides some essential advantage for the inward investor over host country firms. Cantwell (1989, 1991) and Pearce (1999) have characterized such advantages being generated through research and development, and linked it the exploitation of economies of scale. Different analyses of spillovers from FDI ignore Dunnings (1979) analysis of FDI location advantage concerning the benefit conferred on the organization by its decision to operate in a particular host location. This is generally related to the factor endowments of a particular country or region. Morgan (1997) shows such factor endowments will influence not only the levels of inward investment in a region, but also by definition the potential for spillovers from inward investment

Spillovers from multinationals in host country

Caves (1996) found that spillovers are said to take place as MNE s, due to the public good characteristics of their firm specific assets, cannot reap all the benefits of their activities in a foreign location. Two different groups of studies on home - country employment effects found mixed results. Studies by Braconier and Ekholm 2001 and Kravis and Lipsey 1988 found a substitution effect between a foreign subsidiaries activity and its parent's employment. Other studies concluded that substitutions occur between countries with comparable factor endowments which means that low wage countries are better employment substitutes for one another than for high income economy employment (Brainard and Rike, 1997, Braconier and Ekholm, 2001.In studying the motives for disinvestments from European Economic Community countries P.Van Den Bulke(1979) noted that it is not uncommon for host countries to take action when it comes to investment decision s by multinational corporations and even directly or indirectly influence their decision to invest.

Foreign direct invest in Ireland

Evidence from (Rugman and D Cruz 1993) showed that this Porter s diamond model (1990) model does not work well for small open economies such as Ireland The researchers here found they needed to incorporate a broader range of off shoe variables to explain competitiveness. In order to attain minimum efficient size, industries from small open economies commonly have to export a substantial proportion of their output, in the early stages of their development. This suggests that the priority Porter attributes to home demand is simply not feasible for companies from small open economies. O` Donnell, (1997) found that due to the fact that Ireland is a small open economy, it was unlikely that the diamond generating competitive advantage could be contained within Ireland, it was suspected that Ireland would need to incorporate a range of offshore variables to explain competitiveness. However O Donnell (1997) explained it seemed possible that the Irish Economy, and society, is so open that local processes of innovation are limited and many external economies do, in fact cross national boundaries easily “in that case even locally owned firms may not have a home base in Porter's sense”.

In Ireland in 1992 a review of Industrial policy was created called the Culliton review of Industrial Policy. In this review Porter theory of national competitiveness was used and it was recommended that the selection of state agencies should be directed towards the establishment of industrial clusters around sources of national competitive advantage and that Ireland cannot rely on inward investment. Barry and Bradley (1997), in a study on FDI in Ireland, report that surveys of executives in the computer, instrument engineering, pharmaceutical, and chemical sectors show that their decision to locate in Ireland is strongly influenced by the presence of other key firms in their industries.

Rational behind inward investment in Ireland

Manufacturing FDI into and within Europe expanded in the late 1980's. In 1995 Ireland was the ninth most important global location for US direct investment (sixth most important in Europe, third in 1994). The Industrial Development Agency (IDA) estimates that Ireland is by some way the most profitable European location for US manufacturing firms, providing a return on investment of approximately 25 per cent over the past decade, significantly higher than the EU average (IDA, 1999). One of the major reasons for such high FDI inward investment is the volume of Government aid on offer, such as generous subsidy programmes based primarily on the promise of jobs, rent subsidies, offsets against capital investment and a low tax rate for profits derived from “manufacturing and qualifying services”. However, aside from Government incentives, the Irish economy was able to offer a ready supply of scientific-technical labour at an affordable cost to satisfy the needs of US corporations looking for access to the European market. (McGovern, 1998)

In a remarkable comment on the state of the Irish economy, Intel president Craig Barrett reflected on why his firm had come to Ireland. Speaking to Thomas Friedman, author of The Lexus and the Olive Tree (1999), Barrett said:
“We are there because Ireland is very pro-business, they have a strong educational infrastructure, it is incredibly easy to move things in and out of the country, and it is incredibly easy to work with the government. I would invest in Ireland before Germany or France.” (Friedman 1999: 188)

Ireland reliance on fdi
In Ireland in the 1990s the flows of FDI into the country picked up significantly constituting more than 80 percent of the overall flows into Ireland in the later part of the 1990s as American businesses used Ireland as a gateway into Europe Kirby (2002) .In 1998 and 1999 value added activates from multinationals accounted for as much as 85 percent of growth .O' Hearn (2001)

According to the us department of commerce throughout the late 1990 s , Ireland has attracted forty percent of U.S electronic investment into the E.U in the late 1990 s. O'Hearn (2001) This again highlights how reliant the Irish economy is on the U.S economy. Ireland has also concentrated heavily on attracting foreign direct investment and not enough on building up indigenous industries within the country. According to Durkan (2002) the real failure of the industrial policy in Ireland was the failure of indigenous firms to develop. Fanning and Murphy point out that “a government policy focused on job creation- most effectively through FDI is not one that will obviously nurture the domestic entrepreneurial process.

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